At UEM, we are uniquely focused on investing predominantly in listed operational infrastructure and utility assets mainly in emerging markets that are benefitting from underlying structural growth drivers accelerated by global infrastructure megatrends.
These infrastructure assets we invest in often have long term sustainable cash flows underpinned by established regulatory frameworks providing predictable, sustainable and growing income, which drives attractive investment returns.
Structural Growth Drivers
Structural growth drivers are the fundamental pillars to ensure sustainable and accelerating growth in emerging markets.
At UEM we have identified four pillars that are underpinning this growth for emerging markets:
1. Positive Demographics
Typically emerging markets have a young, growing, increasingly better educated working age population and improving female workforce participation rates.
- Improving demographics within emerging markets is driving a higher percentage of the population being of working age which in turn is increasing levels of per capita income which is driving economic growth.
2. Increase in Urbanisation
Emerging markets are seeing increasing rates of urbanisation – by 2030 it is estimated that two-thirds of the global population will live in cities.
- In order for emerging markets to cope with increasing urbanisation, countries must invest in robust infrastructure such as energy, water and transportation, thus providing UEM with numerous interesting and attractive investment opportunities.
- Urban workers are typically more economically productive when employed in manufacturing and services industries than in undeveloped rural environments. These urbanised consumers are then more economically powerful, contributing to their country's economic growth.
3. Rise of the Middle Class
An increasing population in emerging markets have growing discretionary incomes. As incomes increase, we are seeing the expansion of the middle class.
- This is driving an increase in consumption of goods and services but also an increase in demand for essential infrastructure and utilities assets such as electricity, clean water and sanitation before progression to better quality of life assets such as road connectivity, air travel, faster data connectivity etc.
4. Strong GDP growth
Emerging markets are witnessing on average stronger GDP growth then developed markets – providing emerging market populations with rising prosperity.
- This strong GDP growth means emerging markets are becoming important powerhouses of the global economy – now two-thirds of global GDP – which cannot be ignored especially when considering global trade dynamics.
Global Infrastructure Megatrends
Megatrends are forces that create a long term major movement, pattern or trend on a global scale. We have identified four principal global infrastructure megatrends that are driving the investment environment within emerging markets. UEM has a profound and detailed understanding of these megatrends, and how they are shaping and developing the markets in which we invest.
Decarbonisation and investment in energy to support strong economic growth
Overview:
- Rapid economic development requires significant investment in energy infrastructure
- Lower or net zero emissions targets to combat climate change require decarbonisation of the energy matrix
- Geopolitical concerns driving energy security higher up the agenda look to cut reliance on imported oil and gas
- Huge investment in renewable assets and supporting grid infrastructure across emerging markets
Case study – Alupar Investimento S.A.:
- One of the largest private power transmission players in Brazil, operating in Chile, Colombia and Peru
- 7,139km transmission lines and 799MW renewables
- Listed on the Brazilian Stock Exchange
- Market cap USD 1.6bn as at 31 October 2024
Why we are investors:
- 30 year transmission concessions with full inflation protection
- Significant growth opportunity as Brazil upgrades its transmission grid. Strategically positioned in other LatAm countries to bid for smaller but with highly attractive IRRs in US Dollar
- Strong management team with excellent capital discipline and project execution capabilities
- Focus on ROE and shareholder alignment for value creation and dividends
Rapid digital adoption accelerating demand for digital infrastructure
Overview:
- Advantageous demographics of young emerging markets populations typically are more tech savvy driving demand for digital infra
- Affordable information technology drives innovation, knowledge and accountability driving social benefits and commercial returns
- A more capable and connected digital infrastructure is empowering companies in emerging markets to deliver goods and services to a domestic and global customer base
- New and disruptive applications developed in emerging markets are facilitating new business models and efficiencies
Case study – FPT Corporation:
- IT & Telecoms Group with three core segments:
- Provides IT Services to global multinationals and Vietnamese institutions
- One of Vietnam's largest fibre broadband and data centre providers
- Vietnam's largest private education company
- Listed on the Ho Chi Minh Stock Exchange
- Market cap USD 7.9bn as at 31 October 2024
Why we are investors:
- Leveraging Vietnam's skilled IT workforce whilst training the next generation
- Expanding telecoms network benefiting from operational leverage
- Strong entrepreneurial management team
- Top quality client base including over 90 of the Fortune Global 500 including Hitachi, Honda, Denso, Toshiba, Sony, Bayer, RWE and Airbus
- Delivering and targeting net profit growth of 20%+
Trade being fuelled by structural growth drivers, geopolitical dynamics and shifting supply chains
Overview:
- Emerging market economies offering strong GDP growth have increasing importance in the share of world trade
- Supply chain disruptions, geopolitical tensions and increasing export restrictions has led companies to reconsider their supply chains
- The increasingly multi polar world and the reshaping of the competitive environment are presenting new investment opportunities - new manufacturing hubs are being created as there has been an increase in “shoring” (onshoring, nearshoring and friendshoring) and the need to diversify supply chains
Case study – International Container Terminal Services (“ICT”):
- ICT acquires, develops, manages and operates small to medium sized container ports and terminals
- Operates 33 terminals in 20 countries, primarily in origin and destination ports located in emerging market countries
- Listed on the Philippines Stock Exchange
- Market cap USD 13.8bn as at 31 October 2024
Why are we investors:
- Long term concession agreements capturing economic growth of emerging markets driven by the increasing consumption of the growing middle class
- Unique strategy focused on acquiring underperforming ports with scope for operational improvements
- Solid margin expansion driven by operational efficiencies
- Strong management team
Urbanisation and rising of the middle class driving demand for better social infrastructure
Overview:
- Most emerging markets countries lack adequate essential social infrastructure
- The growth of the middle class is increasing demand for better quality services and infrastructure
- Rapid urbanisation is creating a need for huge investments in infrastructure, transportation, communication and internet services creating exciting opportunities for portfolio companies
Case study – Orizon Valorizacao de Residuos S.A.:
- Leader in waste management in Brazil, operating 17 sanitary landfill sites
- These sites are sophisticated complexes to safely process waste that includes biogas/biomethane generation, recycling and waste to energy services
- Listed on the Brazilian Stock Exchange
- Market cap USD 0.7bn as at 31 October 2024
Why are we investors:
- Orizon is the market leader with only 11% of all waste generated in Brazil
- New sanitation legislation in 2020 driving growth of regulated market as 40% of waste in Brazil is still disposed in unregulated dump sites
- A sector with high entry barriers due to the lengthy licensing process, specialised expertise requirements and the need for substantial investments